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Rarely has there been a year when fund managers have breathed such a collective sigh of relief that it’s over. In 2022, stocks sank here and abroad, bonds posted record losses, and no matter one’s investing style – growth, dividend income, small cap, you name it – it just didn’t work.

But a new year beckons, and money managers are eager to put their investment chops to work. To do so, they’ll need to navigate an expected slowdown that may drag major economies into recession and see corporate profits go into a tailspin.

We asked nine Canadian fund managers for their best advice on how to position portfolios for 2023, as well as for a top pick.

Rosenberg: The recession is just getting going and the bear market is halfway done – at most

Fisher: The shock and awe 2023: global market rebound approaching

Craig Jerusalim, senior portfolio manager, CIBC Asset Management

2023 is shaping up to be a clash between expectations and outcomes as central banks battle inflation by raising interest rates to purposefully temper demand. While defensive sectors like staples and utilities may feel safer in this environment, their expensive valuations leave them exposed for an ultimate equity rally, whenever that occurs. Unlike early in this cycle, when the highest growth stocks traded at elevated multiples, today there are many opportunities to uncover companies with above average growth trading at below market multiples. So long as these companies have prudent balance sheets, predictable cash flows and exhibit strong pricing power, there are many ripe opportunities for good old-fashioned stock picking in 2023.

Top pick: Energy producers such as Canadian Natural and Ark Resources are well positioned for the ultimate reopening of the Chinese economy as well as the more balanced global supply/demand picture for energy. However, our top pick for 2023 is Brookfield Corp BN. Following the successful spinout of a 25-per-cent stake of their asset manager, the corporation, which also owns stakes in Brookfield Infrastructure, Brookfield Renewable, Brookfield Business Partners, in addition to insurance and tier one real estate, is trading at too great a discount to its parts to ignore. A backdrop of moderate growth and elevated inflation is almost ideal for this owner of inflation-protected real assets. The company’s stellar track record of compounding capital through market cycles will ultimately be recognized, it’s just a matter of time.

Kim Shannon, founder and co-chief investment officer, Sionna Investment Managers

We continue to believe the Canadian market is an attractive space for investors. Canada is the cheapest it has been in over 40 years relative to the U.S. market on a P/E multiple basis. This cheap valuation is confirmed when looking at the S&P/TSX Composite Index’s book value – approximately half of the S&P 500′s – and the TSX is seeing a very attractive dividend yield of 2.9 per cent – nearly double that of the S&P 500′s. The last time Canada was this cheap was back in 2000, and for the next 11 years after that Canada fairly consistently outperformed the U.S. and global markets. Further, when we look back in history, when inflation is more than 4 per cent, Canada has significantly outperformed the U.S. by an average of 8 per cent.

Top pick: One value holding we are excited about is Magna International MG. Magna is an auto parts supplier that offers design, engineering and manufacturing for vehicle makers globally. As the third-largest supplier in the world, Magna has one of the top reputations for quality, fair pricing and continuous innovation in the industry. With the prevailing regulatory pressure to reduce emissions, electric vehicles and hybrid-electric vehicles have become more desirable. This has created an opportunity as Magna is now a key developer and supplier for EV platforms. The company has a strong balance sheet and a seasoned management team focused on generating returns. Today, Magna trades at less than 10 times next year’s earnings while Tesla’s multiple is 30 times, underscoring its cheapness.

François Bourdon, managing partner, Nordis Capital

Investors should position their portfolios for a recession in 2023 with a defensive bias; bonds should do better than stocks and consumer staples should do better than technology, at least during the first half of the year. Usually, the market bottoms halfway through a recession, and we expect this to occur again somewhere between March and September in 2023. Generally, leadership changes after a bear market; we expect industrials and small cap value to be leaders as they benefit from the industrial transformation towards a lower carbon economy and megacap quality growth to be laggards as globalization loses steam.

Top pick: Nutrien NTR. Fertilizers are in short supply with the war in Ukraine. Natural gas is a key input for nitrogen fertilizers and Canadian natural gas is cheaper than elsewhere, especially outside of North America. Moreover, Belarus and Russia are the biggest potash exporters and they are under sanctions for a while, so demand for Nutrien’s potash will be very good.

Anish Chopra, managing director, Portfolio Management Corp.

The current inverted yield curve strongly suggests an economic slowdown. In this environment, investors can best position their portfolios by maintaining defensiveness during the early part of 2023. Sectors such as utilities, consumer staples and health care fit this defensive profile.

Top pick: Looking at the latter half of 2023, there could be a rebound in quality companies that are economically sensitive. International industrial cyclicals, which have performed poorly in today’s investing environment, could be winners into the next upward economic cycle. An example would be Kone KNYJY, the global elevator company headquartered in Finland.

Jason Del Vicario, portfolio manager, Hillside Wealth Management

2023 will be a year to play defence. While no one knows when a recession will hit, it is safe to assume we will experience one in 2023 or 2024, if we aren’t already in one. Equities generally lead economic activity by about six months so our best guess is that we aren’t out of the bear market woods yet. We believe that investors should favour U.S. dollar-denominated assets such as U.S. Treasuries and fairly or undervalued U.S. equities. (USD tends to appreciate versus CAD during periods of economic weakness or uncertainty.) We also like international equities which have lagged U.S. equities over the past few years and we have found pockets of value in places like the U.K., Hong Kong and Japan.

Top pick: We are much more concerned about the performance of a business over decades; our ideal holding period is forever. With that said, our largest holding since 2014 has been Constellation Software CSU. They do no analyst calls, no media interviews and have never issued a single share since their IPO in 2006. President and founder Mark Leonard and his team are laser focused on things we care about: building shareholder wealth. Nobody has done it better since 2006 and I believe their best days are yet to come.

Denis Taillefer, senior portfolio manager, Caldwell Investment Management

We believe 2023 will be challenging, especially in the first half of the year, which will remain volatile as the markets struggle to break out given the uncertainty around how quickly inflation declines back to the desired target range. The Federal Reserve is committed to breaking inflation’s back and is willing to sustain some economic hardship to do so, which skews the interest rate risk to “higher rates for longer,” which is not fully priced into the market. So from that perspective, we continue to favour companies that are less economically sensitive or that can benefit from overly stretched consumers trading down the value chain [to compensate for rising prices]. The U.S. health care segment has done well in 2022 and we believe it should continue to perform well in this environment.

Top pick: Boston Scientific Corp. BSX: The company develops, manufactures, and markets medical devices that are utilized in a wide range of interventional procedures. It has a diversified portfolio of high-growth products, which positions it well to drive double-digit earnings growth and upwards of 10 per cent-plus annual free cash flow growth over the next few years. The company benefits from strong long-term secular tailwinds from favourable demographic trends and is also benefiting in the near term from a recovery in procedures that were deferred during the pandemic. The stock should provide better downside protection as the nature of its business is much less sensitive to economic slowdowns.

Stephen Takacsy, CEO and chief investment officer, Lester Asset Management

It’s important to stay fully invested, whether in stocks or bonds, as markets can rise very quickly on lower inflation data and less hawkish comments by central banks, which we believe will be the case in 2023. As the Canadian and U.S. economies remain strong with high employment rates, any slowdown in North America should be relatively mild. However, it is important to remain well diversified by industry in recession-resistant non-cyclical and non-resource businesses. With so much fear already discounted by the market, it’s a great time to buy high quality equities at low valuations and also take advantage of current high yields in the fixed-income market.

Top picks: For Canadian fixed-income portfolios, short-term high-yield corporate bonds trading at a discount to par are very attractive now with equity-like annualized returns to maturity in the 6-per-cent to 8-per-cent range. For equities, we are focused on Canada where there are many great businesses trading at historically low valuations, particularly in the small and mid-cap sectors. Examples include instant lottery ticket supplier Pollard Banknote PBL, marine cargo handling and environmental services company Logistec LGT-B, distributor of specialty home hardware Richelieu Hardware RCH, and provider of air cargo services Cargojet CJT.

Christine Poole, CEO and managing director, GlobeInvest Capital Management

Investors should adhere to a portfolio asset mix that meets their risk tolerance level, return objectives, and liquidity needs. A general rule of thumb is to maintain cash reserves to sufficiently fund near-term liquidity needs with longer-dated funds invested in financially strong and profitable income and growth stocks.

Top pick: The health care sector is an attractive industry for investment in 2023 because health care companies provide necessary medical products and services to people and their earnings have the potential to be steadier and hold up in economic downturns. Along with the defensive nature of their earnings, health care companies offer long-term growth through new drug developments and innovative treatments, as well as rising demand from an aging population. Lastly, many health care companies pay a dividend, providing investors with a source of income.

Ken O’Kennedy, chief investment officer, Dixon Mitchell Investment Counsel

Over the last 12 to 18 months we have been increasing allocations to Canada over the U.S. in our internal asset allocation. We continue this positioning in 2023. While we believe the U.S. has some of the strongest competitively positioned and best run companies in the world, they are broadly priced this way and hence could be susceptible to further valuation risk. Despite significant outperformance of the Canadian market in 2022, we are finding attractive value in Canada, especially in high quality small cap businesses. Furthermore, we would not abandon bonds after a truly horrible 2022, as we expect this asset class will once again provide diversification benefits and risk mitigation for investor portfolios.

Top picks: Despite the noisy macro headlines and a bond market predicting a recession in 2023 via an inverted yield curve, we believe the macro backdrop is creating several opportunities for investors in both Canada and the U.S., and even in bonds. In the U.S., we think Intercontinental Exchange ICE provides attractive value for a business producing prodigious cash flow with a track record of value creating M&A. In the Canadian market, Brookfield Corp. BN and Brookfield Asset Management BAM are attractive post-split. Many short-term investment grade corporate bonds are attractive, as those with maturities of one to three years are yielding between 4.5 per cent and 5 per cent.

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